Annual report readability and stock liquidity

We examine the effect of annual report textual complexity on firms’ stock liquidity. Using techniques from computational linguistics, we predict and find that less readable filings are associated with lower stock liquidity. Our study provides evidence that difficult‐to‐read annual reports hinder investors’ ability to process and analyze information contained in corporate annual reports, reducing thereby their willingness to trade which decreases stock liquidity. Our findings are robust to a battery of sensitivity tests, including endogeneity, use of alternative estimation techniques, and use of alternative liquidity and readability proxies.     

Employment quality and 10-K report readability

This study examines the relationship between firms’ employment quality and annual report readability. Using 9,366 U.S. firm-year observations from 1994 to 2018, we find that a favorable employment quality is positively associated with a more readable 10-K report. Such a positive relationship can be observed when firms recruit industry-specialist auditors and when employees are considered important stakeholders to the firm. However, we find a negative association between employment quality and 10-K report readability when there is a presence of firm-level unionization. Our findings inform policymakers that initiatives to promote disclosure readability may be undermined by firms that place less emphasis on employment quality. Further, firm-level unionization can reduce the incentive for firms with a favorable employment quality to provide readable disclosures.     

Readability of narrative disclosures,and corporate liquidity and payout policies

In this paper, we examine the relation between the readability of narrative disclosures in 10-K reports, and corporate liquidity and payout policies. We find that firms with less readable disclosures hold significantly more cash. We also find that this relationship is stronger for firms with weak corporate governance, and with higher financing constraints and refinancing risks. Further analysis also shows that firms with less readable disclosures pay fewer cash dividends and repurchase less stock. Our findings are robust to different estimation methods, and to alternative specifications of key variables. The findings from this study contribute to the emerging research that stresses the importance of 10-K report readability in protecting shareholder wealth.     

Credit default swap spreads and annual report readability

This paper investigates whether annual report readability matters to CDS market participants and how it affects their evaluation on a firm’s credit risk, as measured by CDS spreads. We find that the less readable the annual reports, the higher the CDS spreads. Furthermore, the impact of readability on CDS spreads is more concentrated on firms with high information asymmetry and with investment grade ratings. Our results suggest that investors take into account the readability in their view of the firms’ credit risk. Creditors appear to suffer higher cost on CDS protection of the debts if the underlying firms have less readable annual reports.     

The conditional nature of the value of corporate governance

Agency theory suggests that governance matters more among firms with greater potential agency costs. Rational investors are unlikely to value safeguards against unlikely events. Yet, few studies of the relation between governance and firm value control for investor perceptions of the likelihood of agency conflicts. Shleifer and Vishny [Shleifer, A., Vishny, R.W., 1997. A survey of corporate governance. Journal of Finance 52, 737–783] identify investment-related agency conflicts as the more severe type of agency conflicts in the US. We measure the perceived likelihood of this type of agency conflict using free cash flow (Jensen, M.C., 1986. Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review 76, 323–329). We find that firm value is an increasing function of improved governance quality among firms with high free cash flow. In contrast, governance benefits are lower or insignificant among firms with low free cash flow. We show that not controlling for this conditional relation between governance and firm value could lead to erroneous conclusions that governance and firm value are unrelated.     

CEO power and annual report reading difficulty

We examine the impact of CEO power on reading difficulty of corporate annual reports. We find that CEO power is positively related to reading difficulty, implying that annual reports of corporations with powerful CEOs are difficult to read and understand. More importantly, we find that the relation between CEO power and reading difficulty is moderated by earnings performance or corporate governance. Additional findings suggest that this relation becomes stronger for firms with lower financial reporting quality or for CEOs with shorter tenure. Our study not only joins the debate on the consequences of powerful CEOs but also uncovers several factors that moderate the relation between CEO power and annual report reading difficulty.     

How corporate governance affects payout policy under agency problems and external financing constraints

This paper analyzes the effect of corporate governance on the payout policy when a firm has both agency problems and external financing constraints. We empirically test whether strong corporate governance would lead to higher payout to minimize agency problems (outcome hypothesis), or to lower payout to avoid costly external financing (substitute hypothesis). We find that firms with higher (lower) external financing constraints tend to decrease (increase) payout ratio with an improvement in their corporate governance. The results are consistent with our hypothesis that the relation between payout and corporate governance is reversed depending on the relative sizes of agency and external financing costs.     

Corporate Pyramids,Conservatism and Cost of Debt: Evidence From Taiwan

This study investigates the extent to which the span of corporate pyramids (as measured by the number of ownership layers) is associated with higher agency costs of debt, and whether conservatism can moderate the agency cost. Consistent with corporate pyramids generating higher agency costs and information asymmetries between corporate insiders and outside creditors, we find a positive association between the number of investment layers and cost of debt. However, we also find that multi-layered firms mitigate organizational opaqueness through increased financial reporting conservatism, which results in lower cost of debt capital. These findings provide new insights into the relationship between organizational structure and financial reporting quality.     

The influence of business strategy on annual report readability

Concerns about the complexity of firm disclosures have prompted regulators to initiate projects to improve the readability of annual reports. We investigate business strategy as a determinant of annual report readability. As business strategy fundamentally determines a firm’s product and market domain, technology, and organizational structure, it influences a firm’s operating complexity, environmental uncertainty and information asymmetry. Consequently, business strategy frames the level, wording, and complexity of disclosures. We capture a firm’s business strategy based on the Miles and Snow (1978) strategic typology and measure 10-K readability with Li’s (2008) Fog index. We find that firms pursuing an innovation-oriented prospector strategy have less readable 10-Ks relative to firms pursuing an efficiency-oriented defender strategy. We also find that prospectors display more negative and uncertainty tones while defenders exhibit more litigious tone in their 10-Ks. Our study provides useful insights to policy makers as it suggests that efforts to improve annual report readability may be limited for some firms given that business strategy is a fundamental determinant of readability and pronouncements accommodating different strategic orientations are not feasible.     

Corporate lobbying: Resource-seeking or rent-seeking? Evidence from audit fees

Theory and prior research suggest that corporate lobbying is a primary means that corporations use to influence government policies either for improving firm performance (i.e., strategic decisions) or for rent-seeking activities (i.e., agency costs) but the evidence between lobbying activities and auditor assessments of audit risk remains unclear. Our results show that lobbying firms are associated with higher audit risks and fees, consistent with the idea that lobbying is related to rent-seeking and higher agency costs. In cross-sectional analyses, we find that the positive association between lobbying and audit fees is weaker for firms with strong corporate governance. Further analysis shows that firm financial returns or low earnings quality mediate the relationship between lobbying and audit fees. The results suggest that practitioners, users of financial statements and regulators could benefit by recognizing that lobbying activities could signal managerial opportunistic behavior.